A new proposal published last week claims that creating a new secondary market would to "deflate" the so-called student debt "bubble" by repackaging both public and private student loans for banks to buy and sell.

"The student loan bubble is about to burst," the authors write in the proposal, released by the center-left think tank Progressive Policy Institute (PPI) last Tuesday. The authors warn that while this proposal wouldn't tackle the problem of rising student tuition, they do insist this would help tackle the problem of student debt that's already been taken out, which has recently reached the $1 trillion mark and surpassed both credit card and auto loan debt in America.

"Young college grads have been bearing the brunt of the declining real wages over the last decade, they're taking jobs that are less skill for less pay, and there's a hollowing out of those middle-skill jobs," Diana Carew, an economist at PPI and the lead author on the proposal, told Raw Story. "At the same time, tuition has been rising very rapidly, so they're less likely to be able to pay in the long term."

"We've also been looking at financial innovation and good financial innovation," Carew said. "The importance of having a functioning financial system, because after the financial crisis [people are like] oh innovation, derivatives are bad and take that kind of extremist viewpoint. "

This idea is called the the Student Debt Investment Fund (SDIF). Carew and her co-authors, Jason Gold and Michael Mandel, purport that the SDIF is designed to create a secondary market for both public and private student loans that will allow students to refinance their student debt much like homeowners refinance their mortgages, increasing investment while helping students with debt loads at the same time.

"Basically what it's going to do is reduce the student debt burden and it's going to transfer risk and exposure from the government to the private sector, incentivized through tax credits," Carew said.

Sallie Mae, the private student lender, started out as a secondary market when the government created it in 1972, it eventually started privatizing its operations in 1997 and becoming entirely private in 2004. Sallie Mae new originates private loans, which overall account for about 15 percent of student debt. Carew clarified that the SDIF proposal is different from Sallie Mae in a number of ways.

"Once the SDIF purchases the student loan, it is no longer owned, nor is it guaranteed explicitly or implicitly by the government," Carew wrote in a follow-up email on Friday. "The SDIF transfers risk and exposure from the public to the private sector."

This proposal is one of many submitted to the Consumer Financial Protection Bureau, a new federal agency designed to regulate consumer financial products from payday loans to private student loans, in recent weeks in response to a call for "options that would increase the availability of affordable payment plans for borrowers with existing private student loans."

"While we don’t want to prejudge the comments we may receive, we are looking forward to reviewing each and every suggestion after the comment period closes on April 8," Rohit Chopra, the CFPB's Student Loan Ombudsman, said in an email to Raw Story.

Though PPI isn't alone in its call for new refinancing methods, director of the Federal Education Budget Project at the New America Foundation, Jason Delisle, told Raw Story he was skeptical of the PPI proposal.

He pointed out that most student loans are lent by the government, and a secondary market would create an unnecessary middle man in such a scenario.

"All the stuff in the middle is smoke and mirrors," Delisle told Raw Story on Monday. "The money has to come from somewhere." He added that the lost tax revenue from capital gains taxes would be unlikely to make up for the increased spending power of such a minor cut in student loan payments.

Delisle said that even if federal student loans lowered their interest rate from the current rate of 6.8 percent down to, say, 5 percent, it would do little to alter monthly payments. Running the numbers on the average student debt load of $26,600 cited in PPI's proposal, Delisle said it would only lower monthly payment rates by $25 to $30 a month. And the government doesn't need a secondary market to lower interest rates on federal student loans -- the vast majority of the student loan market -- anyway.

In fact, as part of the economic stimulus, Congress lowered federal student loan interest rates from 6.8 percent to 3.4 percent, and Obama made a campaign issue out of the expiration of the lower rate.

Carew still insists her idea is a win-win scenario, providing a market for investment and helping students, though she said she hopes to get feedback on the proposal by submitting it before it is final. Whether PPI's proposal will be part of the student debt solution, however, remains to be seen.

[Graduate with balloons via Shutterstock]

[Disclosure: The author once worked at the Center for American Progress.]